The earn-out clause (earn-out regeling) under Dutch law
An earn-out clause is a a deferred pricing mechanism in Dutch M&A contract law in a share purchase agreement under which part of the purchase price is not paid at closing but is made conditional on the post-closing financial performance of the acquired business. If the target achieves the agreed targets during the earn-out period, the seller receives additional consideration; if it does not, the earn-out payment is reduced or withheld entirely. Earn-out clauses are widely used in Dutch M&A transactions to bridge valuation gaps between a buyer's and seller's assessment of the target's future prospects, but they also generate a disproportionate share of post-closing disputes.
How does an earn-out clause work in Dutch M&A practice?
An earn-out clause specifies a financial metric, a measurement period, and a formula that determines what additional consideration the seller will receive if the target performs at or above the agreed level during the earn-out period after closing.
The earn-out period in Dutch transactions typically runs from one to three years following closing. The financial metric is usually EBITDA, revenue, gross profit, or a combination. The formula may be a straight-line calculation (a fixed payment for each euro of EBITDA above a threshold), or a tiered structure (payment only once a floor is exceeded, up to a cap). The earn-out consideration may take the form of cash, additional shares in the buyer, or a combination.
In the Dutch context, earn-out clauses are particularly common in transactions involving management buyouts, founder-led businesses, or targets in fast-growing sectors where future performance is genuinely uncertain and the parties cannot agree on a single closing price. The seller's willingness to accept earn-out consideration is often tied to a commitment to remain as manager of the target during the earn-out period, which introduces additional complexity around the interface between the earn-out clause and the seller's management or employment agreement.
What conduct obligations does the buyer have during the earn-out period under Dutch law?
The most contentious aspect of earn-out clauses in Dutch M&A disputes is the buyer's obligation to operate the target in a manner that gives the earn-out a realistic chance of achievement. Where the SPA does not specify the required standard of conduct, Dutch law will imply obligations based on the requirements of reasonableness and fairness.
Under Article 6:248(1) of the Dutch Civil Code, a contract also has the effects required by reasonableness and fairness. Applied to earn-out clauses, this provision imposes an obligation on the buyer to refrain from deliberately running down the target's business, redirecting its customers or revenues to affiliated entities, or otherwise structuring the post-closing business to minimise the earn-out payment. Dutch courts have held that a buyer who frustrates an earn-out through conduct that was not agreed in the SPA may be liable to pay the earn-out as if the targets had been met.
Buyers and sellers should therefore negotiate the conduct obligations expressly and in detail in the SPA. Common provisions include obligations to maintain the target as a standalone business, to continue operating under the same accounting policies used at the time of signing, to obtain the seller's consent before making material changes to the business during the earn-out period, and to provide regular reporting on progress against the earn-out metric.
What earn-out metrics and accounting policies apply under Dutch law?
The choice of earn-out metric and the accounting policies used to calculate it are critical: different accounting choices for items such as depreciation, intercompany charges, and cost allocation can dramatically affect the earn-out outcome, and are a frequent source of post-closing disputes.
The SPA should specify the accounting principles and standards to be applied in calculating the earn-out, whether Dutch GAAP or IFRS, and should include detailed definitions of the key components of the metric. Intercompany transactions between the target and the buyer group during the earn-out period require particular attention: a seller whose earn-out is measured on EBITDA will be adversely affected if the buyer begins to charge management fees or service charges to the target that were not present before closing.
Where the SPA is silent on specific accounting matters, Dutch courts apply a reasonable construction to the earn-out provisions using the Haviltex standard, asking what the parties would have agreed had they addressed the issue. Detailed drafting reduces the risk of judicial or expert reinterpretation after closing.
How are earn-out disputes resolved in the Netherlands?
Earn-out disputes in Dutch M&A transactions are typically resolved through a two-tier process: an expert determination by an independent accountant for financial and accounting questions, followed by arbitration or litigation for legal disputes about interpretation or breach of the earn-out provisions.
The expert determination mechanism, commonly provided under the rules of the Netherlands Institute of Registered Accountants (NBA) or the Rules of the Netherlands Arbitration Institute (NAI), is well suited to earn-out disputes because the core issues are accounting and financial in nature. An expert determination on the earn-out calculation is typically faster and less expensive than full arbitration or court proceedings, and expert determinations by reputable accountants are generally treated as final and binding under Dutch law.
For disputes about whether the buyer acted in bad faith to frustrate the earn-out, or about the proper interpretation of the earn-out formula, arbitration before the Netherlands Arbitration Institute or litigation before the Dutch commercial courts is the more appropriate forum. Involving a contract lawyer in the Netherlands experienced in earn-out disputes is essential for navigating both the expert determination process and any subsequent litigation.